Smallest Startups Are Biggest Job Creators

While elected officials have long extolled the virtues of the small business and its powers of job creation, more attention has been paid recently to the age of firms instead of the size. But what happens when you mix the two and look at the smallest new startups? That is where the real growth happens. Since the late 1970s, new companies with 1 – 4 employees accounted for 86% of new firms. During roughly that same time period, startups with 1-4 employees have created more than 1 million jobs per year while those with 5 – 9 employees have created 500,000 per year. The figures come from the latest Business Dynamics Statistics report from the Kauffman Foundation.

"The Return of Business Creation" also found that for the first time since 2006, new business formation increased – and the increase was the largest in nearly a decade. However, the pace of recovery for job creation has been tepid, especially at the young firms that drive employment growth for the entire U.S. economy.

The report examines two classes of new businesses from among all new businesses formed in 2011 that most closely resemble entrepreneurship: companies less than one year old with one to four employees and those with five to nine. The study finds that the smallest of these new firms account for most of the increase in firm formation in 2011.

"This is a significant finding because it reinforces how important these young, small firms are to the economy," said Dane Stangler, director of research and policy at the Kauffman Foundation and co-author of the paper. "While it would be ideal to have more recent data, these are accurate measures of firm formation and job creation that policymakers and supporters of entrepreneurship can depend on for decision making."

The Business Dynamics Statistics (BDS) series compiled by the U.S. Census Bureau tracks the annual number of new businesses (startups and new locations) from 1976 to 2011. The BDS represents what can credibly be deemed the gold standard of business creation data. In contrast to other indicators that combine employer firms (those coming into existence with employees) together with non-employers and self-employment, the BDS tracks only employer companies. It also allows researchers to separate firms (unique businesses) from establishments (multiple locations of single firms, such as a new Starbucks location) and make important advances in data collection and policymaking.